In this article we’ll look at:
- Accounting treatment of leases by lessors (as well as lessees)
- How to account and discuss sale and leaseback transactions
Lease Accounting Treatment – Lessor
For Finance Leases
- De-recognises the tangible asset (and recognises resultant gain/loss).
- Lessor recognises a receivable equal to the net investment of the lease.
- Leased asset not recognised on the Statement of Financial Position
- Recognises finance income based on a pattern reflecting a constant periodic rate of return on the lease.
For Operating Leases
- Treats contract as an executory contract.
- Retains leased asset on the Statement of Financial Position
- Recognises lease income on a straight line basis over the lease term.
Sale and Leaseback Transactions
Any excess of sale proceeds over carrying amount is recognised by the lessor over the lease term and not immediately.
- If the sale price is at fair value, any excess of sale proceeds over carrying amount is recognised by the lessor immediately.
- If the sale is below fair value, any profit or loss should be recognised immediately unless the loss is in respect of future lease payments below market value in which case it is deferred.
- If the sale price is above market value, the excess of fair value is amortised over the lease period.